Predictions that key cities in Australia are facing a housing glut have big implications for building material stocks although investors do not seem particularly worried about this development today.
Research firm BIS Shrapnel warns that Australia will have a housing glut of 12,000 dwellings in the 2017-18 financial year after national undersupply peaked at 108,000 in the last financial year, reports the Australian Financial Review.
The BIS report goes on to predict that the glut will deepen in the two years after 2017-18 with Victoria and Western Australia the worst hit as the biggest construction boom in Australia's history comes off the boil.
While shares in CSR Limited (ASX: CSR) fell 2.5% to $3.54 during lunch time trade, shares in fellow building supply companies like Boral Limited (ASX: BLD) and James Hardie Industries plc (ASX: JHX) are trading 0.5% to 1% higher.
That's not surprising as CSR is the most exposed to the domestic building market of the three with onshore revenue accounting for around 97% of total sales compared with Boral at 82% and James Hardie at just 16%.
Cement supplier Adelaide Brighton Ltd. (ASX: ABC) will also feel the brunt of any slowdown as just about all of its revenue is made here and the stock is trading 0.4% lower at $4.63.
But it's not all bad news. New South Wales is still facing a housing shortfall of around 40,000 dwellings although the market there is expected to slow by 2018 due in part to rising interest rates.
Adding to the headwinds, Australian banking regulators are making the big four banks and Macquarie Group Ltd (ASX: MQG) carry more capital to buffer against external shocks and this means less lending to the local housing market.
However, this isn't the time to panic for a number of reasons. Firstly, housing construction isn't facing a material slowdown for at least two years and this gives building supply companies plenty of time to react to changing market demand.
Secondly, we should see a pick-up in infrastructure spending that could offset some of the slowdown. Research by Oxford Economics and PWC is predicting infrastructure spend to reach $275 billion by 2025 from around $200 billion this year, and this includes the slowdown in capital expenditure by the mining sector.
Further, building supply stocks that are most exposed to Australia are already trading at a fairly large discount to the sector as the market is already factoring in some of the downside risk to the group.
I am not suggesting that investors should be blasé about the risk of the housing slowdown in 2018 but I think stocks like CSR can still climb due to its undemanding valuation in spite of this potential headwind.
